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15 Cards in this Set

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Demand deposits are a low-cost, but not costless, source of funds and have a high degree of withdrawal risk.
T
The main idea of the information cascades exercise is that engaging in herd behavior may be rational. In particular, if one believes that others are rational and have access to hidden information, herding behavior can be very rational.
T
The Fed discount window is an opportune place to borrow reserve shortfalls because of its lower than market rates.
F
Discount window is higher than the market rates (fed funds rate)
Suppose that Congress allows defined-benefit pension funds to use a higher interest rate to calculate the PV of their expected future liabilities. This higher discount factor will make pension funds look less insolvent, even though their business risk has not changed.
T
Life insurance companies typically have greater liquidity risk than property-casualty insurance companies.
F
Deposits that provide a relatively stable, long-term source of funds are called
a. demand deposits
b. wholesale deposits
c. fed funds purchased
d. core deposits
e. loanable funds
d. core deposits
Subordinated debt (SD) has been proposed as a means of increasing the degree of overall market discipline at a depository institution (DI). Which of the following objectives will SD help achieve?
a. Issuing SD might reduce the risk of DI insolvency.
b. The expected cost of issuing SD should decrease as the risk of the DI increased.
c. Secondary market yields on the SD would be inversely related to an increase in the risk of the DI.
d. Mandatory SD would reduce transparency at DIs.
e. SD would further emphasize the use of capital forbearance.
a. Issuing SD might reduce the risk of DI insolvency.
The process of encouraging owners to be more knowledgeable of the risk profile of the DI is to encourage more
a. regulator discipline
b. stockholder discipline
c. regulatory compliance
d. moral hazard
e. depositor discipline
b. stockholder discipline
The contagion effect
a. occurs when liquidity risk problems at bad banks damages well-run banks.
b. is eliminated by government insurance against bank runs.
c. results when interest rate risk exacerbates credit risk and liquidity risk exposures.
d. stems from the positive correlation in FI returns.
a. occurs when liquidity risk problems at bad banks damages well-run banks.
What is the average implicit interest rate (IIR) on a $25,000 account if the bank's average management costs are $500 and annual fees average $150?
a. 3.0% < IIR < 4.0%
b. 0.0% < IIR < 1.0%
c. 1.0% < IIR < 2.0%
d. 2.0% < IIR < 3.0%
e. 4.0% < IIR
c. 1.0% < IIR < 2.0%
IIR = (500 - 150) / 25,000 = 350 / 25,000 = 1.4%
Suppose that Congress were to demand that defined-benefit pension funds use a lower interest rate to calculate the PV of their expected future liabilities. This lower discount factor would make pension funds look more insolvent.
T
When calculating the PV of liabilities, a lower discount rate would increase the PV of the liabilities.
Life insurance companies typically have greater liquidity risk than property-casualty insurance companies.
F
Mortality rates are much more stable than loss rates due to property insurance claims (such as hurricane damage due to Katrina).
Bank regulators can discourage moral hazard by requiring banks to maintain greater capital levels.
T
Securitization enables mortgages to be financed by outside investors--who now earn mortgage interest income--instead of traditional lenders. Lending institutions have therefore not welcomed the increased securitization of home mortgage loans.
F
Liability-side liquidity risk may be a result of OBS lending commitments.
F
Asset-side, not liability-side, liquidity risk may result from lending commitments.

A commitment to lend is a commitment to create a loan. Recall that a loan is an asset to an FI.